Public Accounts CommitteeWritten evidence from Thames Water
Thames Water Utilities Limited
Thank you for the opportunity to address the Public Accounts Committee last Wednesday, 22 January 2014. I hope you find the information I provided useful in your ongoing inquiry into the National Audit Office’s recently published report on infrastructure investment, and its impact on consumer bills.
I promised to provide the Committee with written responses on a number of areas and trust the following information is helpful. I would also like to respond to some comments made by the Committee that I did not have an opportunity to address during the meeting.
Investment and Dividends
As I explained to the Committee, we are undertaking record levels of investment, in excess of £1bn per annum. I enclose, as Appendix 1, a summary of the company’s capital investment in each year since privatisation (rebased to 2012/13 price levels) which shows a significant increase in overall investment. Our investment plans are developed for each five year regulatory period (known as an Assessment Management Period (AMP)) and, as the chart at Appendix 2 demonstrates, investment in the current five year period is running at over 60% more in real terms than in the period following privatisation.
In relation to dividends, I enclose a chart showing the dividends paid since the acquisition of the company in 2006, and the profits made over that period (see Appendix 3). This shows that, on a cumulative basis, dividends paid have amounted to just over four fifths of post-tax profits. For the year ending 31 March 2013, the approximate dividend yield (calculated on an estimated value of the company) was around 5%.
I would also like to address the Committee’s remarks on Charlie Elphicke MP’s unpublished report on the water industry, and the subsequent File on Four radio programme that reported his findings. In Committee, it was put to me that Mr Elphicke’s conclusions appeared irrefutable, given that the analysis was based on our own published accounts. During the programme, Mr Elphicke clarified that he had concluded that investment had fallen by comparing investment in the years 2007/8 and 2012/13.
Adjusted for RPI, it is true that Thames Water’s capital expenditure in 2012/13 was very slightly less than in 2007/8 (by around £3 million). However, by comparing investment periods, rather than individual years, a clearer and more accurate picture of infrastructure spending emerges.
The chart comparing infrastructure investment by AMP and adjusted for inflation (at Appendix 2), clearly demonstrates that spending continues to increase in real terms. During the AMP period encompassing 2007/08, total investment, adjusted for inflation, was £4.4 billion. For the current AMP period, encompassing 2010/15 investment is projected to be £5.4 billion.
Our data is based on our own published accounts, and is adjusted for inflation using the Retail Price Index. Both the data and our calculations have been independently verified.
External And Inter-Company Loans
You asked what proportion of Thames Water’s total debt has been sourced from external bond-holders, compared with that of inter-company loans; and the relative interest rates of both.
Thames Water Utilities Limited
To be clear, the debt raised to finance the activities of Thames Water Utilities Limited (the entity that serves customers and collects payments from customers—TWUL) is sourced entirely from third party investors (banks, investment funds and other financial institutions). The majority of the debt is raised by TWUL’s financing subsidiaries, which are resident in the UK for tax purposes. The finance companies on-lend the funds to TWUL on almost identical terms. The interest rates vary, depending on market conditions when the company needs to access the financial markets, but looking at the entire debt portfolio—which I have now confirmed stands at around £8.5bn, not the £7.5bn I referred to in Committee—in 2012/13 the average interest rate stood at around 5% per annum.
The Kemble Group
The Committee will recall that, when I provided oral evidence, I did so on behalf of Thames Water Utilities Limited. However, in the interests of completeness, I felt it would be useful to outline some of the relevant financial arrangements of the parent business.
Sitting above TWUL, there are a number of holding companies which, together with TWUL, constitute the Kemble Group. At this level, the group has borrowed an additional £750m from banks and the bond markets. Interest costs on this debt are c.7.75% per annum.
Our shareholders have also provided a £310m loan to the Kemble Group to help finance the acquisition of Thames Water. This loan carries an interest rate of 11%; interest rates were much higher when the loan was made in 2006. It is also the case that this loan, unlike much of Thames Water’s debt, is unsecured and thus demands a higher interest rate from the market.
It is important to note that the holding company debt is ring-fenced from the regulated business and has no impact on customer bills.
Our engagement with Customers
A number of the Committee members were eager to learn more about how we have engaged with our customers in the latest price setting process. As I said, the research underpinning our plans for 2015–20 captured the views of 30,000 customers. We achieved this through a number of channels, including focus groups, interviews, surveys and formal public consultations. I have enclosed three key documents for the Committees review which provide a detailed explanation of how we have engaged with our customers in the price setting process:
Part A2 of our summary business plan for 2015–20, which outlines exactly how we engaged with our customers, and with whom we engaged;
a summary of our plan, designed to inform our customers about the findings from our engagement; and
the report of our Customer Challenge Group, an independently chaired group of customer representatives who have assessed the quality of our customer engagement and plans.
Thames Water Ownership
The Committee also suggested that Thames Water Utilities Limited is owned by the Macquarie Group. This is not the case. The company was acquired by a consortium of international investors in 2006 who are known, collectively, as the Kemble Group. The Macquarie European Infrastructure Fund II is a significant minority shareholder in the business (holding approximately 26% of the business), but sits alongside a group of other major investors such as a number of pension funds (including BT) and sovereign wealth funds from countries such as Abu Dhabi and China. Thames Water Utilities Limited is based in the UK. The Macquarie European Investment Fund II (but not Thames Water Utilities Limited) is based in Luxembourg and makes investments in countries throughout the EU on behalf of its investors, approximately 70% of which are pension funds from the UK, Europe and around the world
I can also confirm that if one of our shareholders chose to sell some of its shares in the Kemble Group, we would inform the industry’s economic regulator, Ofwat.
Finally, I would like to clarify for the Committee that the current management fee charged by Macquarie in regard to Thames Water Utilities Limited, is £3.5 million—significantly less than the £100 million than was mentioned, though slightly higher than the estimate I gave during the evidence session.
I trust that the evidence set out in this letter provides the Committee with the information it requires.
Nick Fincham
Director of Strategy and Regulation
30 January 2014